A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘culture’

Measurement matters more than money

In Articles, Commentary on 24 July 2018 at 7:56 am

A firm’s profit-sharing model is a poor determinant of collaborative behaviour.

Motivational theory predicts that firms with equal-share or lock-step model would be far more collaborative than those with more performance-based reward systems. The logic is that in equal-share firms there is a strong financial incentive for partners to grow the collective pie by sharing clients, staff and other resources.

I can think of a number of firms where this theory simply does not hold true.

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Source: strikingly.com

Despite equal profit share, partners in these firms hoard work and clients, they hold onto resources and they operate primarily in silos. They continue to do this despite all the evidence that better collaboration will result in higher profits, more staff engagement and stronger client loyalty.

SO WHAT IS GOING ON?

In many firms, partner performance measures are oriented around financial metrics like personal and supervised production, fees billed, fees collected, work referred, utilisation, write-offs and WIP. They are usually reported monthly in arrears and are transparent to the rest of the partnership.

It appears to me that silo’ed behaviour is driven by a reaction to the measurement system by three different types of partners.

Insecure Overachievers

Insecure partners view their relative ranking on performance reports as a signal of their worth, both to themselves and others. The data is a form of validation or redemption. Getting higher up the individual billings league table takes on new meaning, that is, proving that they’re ‘okay’. At the extreme, one hears of stories of partners gaming the practice management system and manipulating data so as to rank higher. Perhaps in an eat-what-you-kill firm, this behaviour is more understandable, but in an equal-share firm, it just smacks of paranoia.

Inflated Egos

Those with above-average egos use individual reporting as a competitive scorecard signalling that they’re winning and the others are losing. While some internal competition is healthy, in some firms, it strays into a dog-eat-dog culture where collaboration is the last thing on people’s minds.

Tenureds

‘Tenuritis’ is my term to describe the mindset of a partner who feels that as an owner they have a self-directed job for life with next to zero accountability. For those even partially inflicted with tenuritis, the performance reports have little impact. They’re mostly ambivalent about the data and care little whether they sit at the top, middle or bottom.

With the Insecures and Inflated Egos it is the symbolic power of measurement that’s primarily driving behaviour. With the Tenureds it is the over-reliance of measurement as a leadership tool which, with these individuals, has very limited power.

SO WHAT CAN YOU DO ABOUT IT?

The key issue here is that measurement should not be used as a proxy for leadership. It’s just plain lazy (and a little cowardly) if firm leaders send out the monthly reports and then think their job is done.

Effective leadership is about [i] providing regular feedback – the good, the bad and the ugly, [ii] active listening, [iii] setting direction, [iv] developing capability, [v] offering support, [vi] opening doors, and [vii] removing constraints.

In equal-share firms, effective leadership is crucial to mitigate the measurement system risks outlined above. It is also fundamental to restoring a sense of fairness across the equity partnership and to get everyone performing to their full potential.

Without effective leadership, meritocracies run the risk of letting the “money do all the talking”. The differential in reward might address the perception of fairness but it does little for partner development, especially for those not intrinsically motivated by the Dollar. Profit-share, on its own, is a blunt pseudo-precise deferred performance management tool.

I believe a firm’s leadership capability is a far better determinant of one-firm collaborative behaviour than its profit sharing model. There are thousands of examples of deeply collaborative public and private companies that operate with merit-based rewards. There’s no reason why professional service firms should be any different.

CALL TO ACTION

If cross-firm collaboration is on your strategic agenda, don’t just jump to the reward lever and expect everything to change. Rather take some time to think about what and how you measure and the critical role your leaders play in driving one-firm behaviour.

The end of the club

In Articles, Commentary on 25 June 2018 at 10:09 am

First published in the Australian Financial Review, 22 June 2018

A ‘club’ is a Tier 2 full-service firm of individual practitioners who enjoy each other’s company. It is a nice, collegiate, shared-office environment where partners enjoy a relatively high degree of autonomy and welcome the occasional cross-selling opportunity.

And the club, as a business model, is about to die.

The principal reason for its demise is that most of the individual practitioners that make up the club will not be able to compete. Unless their expertise is unquestionably superior or they have welded-on client relationships, these solo specialists will start to lose out to a combination of freelancers, platforms, networks, focus and one-firm firms.

Screen Shot 2018-06-25 at 9.15.54 am

Source: strikingly.com

Solo specialists versus Freelancers

Many of Australia’s Tier 1 law firms thinned their partner ranks during the 2010’s (a trend reversed in 2018). This was done through de-equitisation, early retirements and forced redundancy. Ashurst, for example, had 186 Australian partners in July 2013 and 142 in July 2016.

A number of these very accomplished practitioners set up shop as high-end legal freelancers. Using sophisticated cloud-based software, a laptop and a phone, these lawyers have next to zero overheads and the flexibility and agility to practice where and when they like. There is simply no contest when matched to a Tier 2 practitioner constrained by firm pricing policies, high office rents and administration expenses.

Solo specialists versus Platforms

HWL Ebsworth and Mills Oakley stand out as two very successful high-growth platform firms. Their strategy is about aggressively acquiring partners with portable practices and offering them incomes more directly aligned to their total financial contribution, both direct and referred. These firms have strong operational disciplines and lean back-offices. They are well led with partners focused less on office politics and more on things that matter, that is, their clients and staff. HWL prides itself on offering partner chargeout rates lower than many Tier 1 and 2 firms and fixing these rates over time.

These platform firms run harder and faster than the clubs. The energy and discipline they bring to the market gives them a real edge. And if they come across a high-flying solo-specialist in a sleepy club, they’ll make them an offer they can’t refuse.

Solo specialists versus Networks

The past five years have seen the emergence of a number of network law firms and legal staff companies. Examples include Lawyers on Demand, LexVoco and Crowd&Co. There are also a number of legal staff companies aligned with established law firms, such as Corr’s Orbit, Allens’ Adapt and Minters’ Flex. One standout element of these networks is they have a very small team of full-time staff and only contract lawyers to work when there’s a confirmed fixed-fee client assignment.

The toe-to-toe analysis of networks versus solo-specialist yields very similar conclusions to the Freelancer and Platform models.

Solo specialists versus Focus firms

Focus and boutique firms specialise in a narrow range of worktypes or client sectors. Two standout examples in this category are SBA Law, a Melbourne-based corporate boutique, and Thoroughbred Legal, a general practice firm focused on the thoroughbred racing industry.

These firms position themselves as having deep expertise, knowledge and critical mass, and a service delivery model 100% attuned to the needs of their target market.

Beaton data points to technical expertise and understanding of client industry as key drivers of client choice. As such, focus firms will almost always out-credential and out-compete Tier 2 practitioners largely competing on their own.

Solo specialists versus One-firm firms

David Maister coined the term “one-firm firm” to describe a full-service firm where,

  • the firm brand is stronger than individual partner brands,
  • the firm has a ‘house style’ and delivers consistent quality across the board,
  • the firm’s culture is deeply collaborative in regard to sharing clients and resources, and
  • the firm is prepared to invest in new profit growth initiatives without prejudicing individual practitioners.

One-firm firm’s competitive advantage comes from wider ‘institutionalised’ client relationships and the ability to bring many minds to solve complex client problems.

Over the past decade, many larger clients have sought to reduce the size of their panels and form strategic partnerships with fewer (one-firm) firms. This procurement trend effectively locks-out the solo-specialist in a collegiate club.

The preferred strategic option

Over the next five years, some clubs will fold, some will fracture into a series of boutiques and some will be acquired. Most will try to address their situation by trying to become one-firm firms. The leadership challenge of this transformation is huge, and the risk of losing star partners and associates along the way is high. Unfortunately, I expect only a small number will be able to make the necessary changes and survive.

Formula won

In Articles, Commentary on 29 March 2018 at 1:21 pm

 

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Source: Kazuki Yamamoto

Formulas, equations and rules of thumb continue to be a popular way to communicate important principles in leading and managing professional service firms. For your interest, here are the ones I use or refer to most often…

 

CHANGE

David Gleicher: D x V x F > R. D = level of dissatisfaction with the status quo. V = a vision of a future state i.e. clarity of what we’re moving to. F = first steps in a clear action plan. R = level of resistance to change. If R is more than the multiple of the other three, then no change. Click here for more. A graphical variation of this formula:

eqn-for-change

STRATEGY

A.G. Lafley and Roger Martin: Firm strategy = 5 questions – What are our winning aspirations? Where will we play? How will we win? What capabilities do we need? What systems and enablers are required? Click here for more.

Mehrdad Baghai et. al: McKinsey 3 growth horizons – concurrently manage both current and future opportunities for growth. Spend roughly 70% of your time on H1, 20% on H2 and 10% on H3. Click here for more.

George Beaton: Firms that fly = a shared vision + a strong culture based on shared values + shared power across the firm and key stakeholders + strong leadership and management to pull it all together and sustain it. Click here more.

Joel Barolsky: In the past… Firm Success = Ability x Stability (firms succeeded if they were competent practitioners and were able to keep the firm stable and collegiate). Over the past decade with the increase in client power and sophistication… Firm Success = Ability x Stability x Affinity (firms that have close trusting relationships with their clients outperform others). In a VUCA future… Firm Success = Ability x Stability x Affinity x Agility (firms that can make changes that add value quickly and efficiently will outperform others). Click here for more.

BUSINESS MODEL

David Maister: Profit per Partner = Leverage x Utilisation x Realisation x Blended Hourly Rate x Margin. Click here for more.

Ron Baker: Profit = Intellectual Capital x Effectiveness x Value-based Price. “Effectiveness” is a measure of the outcomes achieved for the client, not like the Maister equation which focuses on the cost of the inputs used to create the service. “Intellectual Capital” includes leveraging human capital, structural capital and social capital. Click here for more.

ORGANISATION DESIGN

Dunbar’s Rule: Our brains are only capable of sticking together within a community of around 150. Design organisations, offices, divisions, etc. with this number in mind. Click here for more.

REMUNERATION

J. Stacy Adams: People will trust a remuneration model when they perceive, [1] there is a sense of fairness of their contribution relative to their reward, AND [2] there is a sense of fairness of others’ contribution relative to the reward that others receive. Click here for more.

INDIVIDUAL PERFORMANCE

Mitchell and Porter: Performance = Motivation x Ability x Environment. Click here for more

David McClelland: Match jobs to an individual’s relative needs. People have three core needs, usually with different weights – Need for Achievement, Power and Affiliation. Achievement – the drive to excel, achieve in relation to a set of standards, strive to succeed. Power – the need to make others behave in a way that they would not have behaved otherwise. Affiliation – the desire for friendly and close interpersonal relationships. Click here for more.

Dan Pink: Drive = f(Purpose, Mastery, Autonomy). Click here for more.

STAFF TURNOVER AND PRODUCTIVITY

Mornell: If you make a mistake in hiring, and you recognise and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. Click here to read more.

Revenue per employee: In most industries, above-average firms produce revenue per employee that exceeds three times their average employee’s salary. Interestingly at Apple, it exceeds nine times. Click here to read more.

CLIENT RELATIONSHIPS

David Maister and Charlie Green: Trustworthiness = (Credibility + Reliability + Intimacy) / Self-orientation. Click here for more.

Joel Barolsky: Long-Term Relationships = (Understanding + Reliability + Value + Affinity) / Complacency. Click here for more.

Ford Harding: Geometric growth of social networks. With 90 strong connections in your personal network, you can make around 3,500 matches i.e. introduce one person to another for mutual benefit – see chart below. Click here for more.

Screen Shot 2018-03-28 at 7.18.08 pm

SALES

Sales 101: Your Revenue = Number of Opportunities x Average Value x Overall Strike Rate. Click here for more.

Andrew Sobel: Number of Opportunities = Number of initial conversations you have or initiate x % that convert to a proposal. Click here for more.

McKinsey’s 2-4-8: Directors in McKinsey need to be working on 2 major assignments, be the process of proposing for 4 more, and in communication with 8 more prospective clients. Management within McKinsey follows up to ensure that 2-4-8 is a reality. Click here for more.

PRICING

The Discount Matrix: The amount of additional revenue required to make up for the lost profit as a result of a price discount:

Screen Shot 2018-03-28 at 7.46.53 pm

SERVICE EXPERIENCE

Frederick Reichheld: Net Promoter Score = % Promotors (i.e. clients that score 10 or 9) – % Detractors (i.e. clients that score 1 to 6) on the question, “What’s the likelihood of recommending XYZ to a friend or a colleague?” Click here for more.

Customer Effort Score: “Firm XYZ made it easy for me to handle my issue!” (on a Strongly agree / disagree 7-point Likert scale. Click here for more.

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What formulas or rules of thumb do you use? Please share using the comments feature…

The accountants re-enter legal. Meh!

In Articles, Commentary on 24 November 2017 at 12:17 pm

There are countless articles on the threat of the Big 4 re-entering the legal market. Yes, they’re cashed-up, capable and well connected, but I don’t think it will be as smooth a road for them as many are predicting. A deeper analysis suggests there are five factors that will limit their growth.

#1 The one-stop shop segment is small

The essence of the Big 4 value proposition is one-stop shop: buy all your business advisory services from us and there will be lower transactions costs, a deeper understanding of your needs, more integrated advice, higher levels of service consistency, better coordination and greater convenience.

The problem is many sophisticated legal buyers just don’t buy it!

For operational, run-the company work maybe, but for bet-the-company and reputation-sensitive matters, buyers generally prefer horses for courses. They back themselves in picking out tried and tested specialists, rather than relying on one firm to wheel out all their colleagues. Intuitively, these buyers recognise the benefits of cognitive diversity and are wary of the party line or groupthink. They feel it’s easier to hold a specific firm accountable (and sueable) for their advice when it’s more discrete. Many senior buyers regard the ‘all eggs’ approach as risky and lazy.

OLYMPUS DIGITAL CAMERA

Source: alphacoders.com

#2 Brand limitations

PwC is the most well-known and powerful brand in the global business services market. The other Big 3 are not far behind them. Over the years they’ve leveraged these brands to develop massive global management consulting depth, breadth and reach.

Notwithstanding these advantages, firms like McKinsey, BCG and Bain still are thriving at the top-end of the consulting market. The evidence would suggest that many clients tend to shy away from accountants when it comes to solving their most complex business problems.

After decades of organic investment, PwC had to resort to paying top dollar to buy Booz & Company to make serious inroads into the high-value segment. Interestingly, they resorted to a new brand of Strategy& for their consulting business rather than a brand extension of PwC. It appears that PwC thought their own brand was a net negative in fighting the likes of McKinsey.

All the evidence from graduating MBA students across the globe points to the top students preferring the specialist consulting firms over the Big 4. I can only imagine it will be the same at the premier law schools.

#3 Ring binders

I did a small consulting project for Booz about a year before they sold out to PwC. Yes, it was all my fault :o)

In speaking about competitors, they referred the Big 4 as “ring binder” consultants. What they meant was that the Big 4 consultants were good at following a predefined process documented in a ring-bound manual. What was implied was that the Big 4 consultants couldn’t really think for themselves.

While grossly disparaging, there is an element of truth in these comments. In order to achieve scale and process efficiencies, resource fungibility, accelerated learning and service consistency across all business lines, the Big 4 have sought to codify their approach and have trained their consultants in how to use it. One can only imagine they’ll adopt a similar method in legal to achieve similar benefits.

The standardised approach is brilliant for repeat work but can come unstuck if things vary widely from the norm. Top GCs will run a mile if they feel they’re being ring-bound in handling their complex matters that they feel require bespoke solutions.

#4 Conflicts

I was shown some recent analysis that listed the number of different law firms and freelancers engaged by the ASX50. The list had over 300 names on it. I can’t vouch for the precision of this research but intuitively it feels right.

One of the key reasons for this fragmentation is conflicts. Most legal clients are particularly sensitive to the same advisors being involved, directly or peripherally, on both sides of a transaction or a dispute.

The Big 4 are just that. Four! This will inevitably put major limits on their penetration of the legal market. The threshold test of perceived conflict in legal matters is much higher than say helping competing companies implement an enterprise software system.

The large mid-tier firms like Grant Thornton, BDO, RSM and Pitchers will be loath to enter legal, beyond tax, because of the fear disenfranchising their major referrers of work.

#5 The club

For the Big 4 to make serious inroads into legal, quickly, they will need to poach some heavy hitters from heavy hitting firms. Assuming they can offer better incomes, they’re asking these lawyers to leave their club.

This is what a typical lawyer rainmaker will weigh up in considering the move..

The new club is a lot lot bigger and I will have even fewer decision rights. The new club will pander less to my specific needs give it already has dozens of heavy hitters. The new club will ask me to fit into their service style and product ‘packaging’. The new club will be run by beancounters.

Nah! I’d rather stay.

6 strategic shifts and implications for HR

In Articles, Commentary on 8 November 2017 at 4:22 pm

By Joel Barolsky and Sue-Ella Prodonovich

If you have HR responsibilities in a professional services firm then you’re working in the epicentre of turbulent times. Changes to our workforce population, participation and productivity are throwing up new challenges while the expectations of firm owners and employees are changing – but not necessarily in sync.

Here are six strategic shifts we’ve observed which we believe will have profound implications for HR.

#1 Shift to the rocket model 

The next five years will see a migration away from the pyramid model towards the rocket model. A typical pyramid structure has a partner at the top supported by one or two senior associates and four or five juniors. In the rocket model, most juniors are substituted by a combination of technology and para-professionals.

For HR this means

  • Partners need a new set of skills and knowledge to manage their rockets and to win and deliver projects, profitably
  • Improvement in digital literacy across the board.
  • The end of the apprenticeship model that involves training juniors on-the-job on low-level process work.
  • New recruitment markets, processes and criteria to include non-technical areas.
  • Measurement and reward systems that reflect non-time-based pricing, innovation and collaboration.
  • Managing a much more diverse culture of professionals, para-professionals, technologists and project managers,

#2 Shift to workforce accordions

Most firms currently operate with a defined cohort of full-time staff. With growing variations in client demand, there is a growing trend towards the accordion model. This model means having a blend of full-time staff plus a pool of pre-selected trained variable cost contractors. Corrs’ Orbit, Minters’ Flex, Pinsent Masons’ Vario, Allen & Overy’s Peerpoint are firm-based accordions. LOD (Lawyers on Demand), LexVoco, Crowd & CoBespoke are examples of specialist providers in this space.

Other variants of the accordion include flexible work arrangements, hot-desking, secondments, reverse secondments and sabbaticals. Maddocks recently reports that over 20% of its partners were working outside the ‘normal’ 8 to 6, five days a week model.

HR complexity increases exponentially as a firm increases the variability and flexibility of its workforce.

#3 Shift to smart collaboration

With the increased competition from in-house providers, boutiques and individual freelancers, most multi-service firms are recognising that their main competitive advantage lies in the collective. If firms continue to be just a collegiate group of individual practitioners, then they will lose share to other competitors with lower costs and/or better-perceived quality.

Four-Seasons-Orlando-Coffee-Latte-Art-Barista-Bootcamp

Source: uspinjaca.hr

While economic geographers have identified the positive relationship between physical co-location of knowledge workers and firm performance, HR plays the critical part of bringing capable people together. It’s through true cross-practice collaboration that the firm can offer something that others can’t. Bringing a diverse set of expertise and experiences to solve clients’ toughest problems is more profitable, more fun and more valuable to the client. It’s also a lot harder to do.

#4 Shift to supportive intolerance

There is ample evidence that better leadership leads to better performance. Firms with a depth of leadership capacity across all its partners are in a much better position to handle market uncertainties than those with just one or two stars.

Developing leaders doesn’t just happen through a wish and a prayer. It requires a particular style of operating, first coined by David Maister, called ‘supportive intolerance’. The support bit is offering partners personal insight/reflection, coaching and training to help them develop their full leadership potential.

The intolerance bit is making them accountable for their actions and inaction. This means calling-out behaviours inconsistent with firm values, providing constructive, prompt and honest feedback, having full transparency around agreed actions, and if all else fails, reducing reward as a sanction.

HR should be the lead change agent in introducing this style of leadership and operations. Again, it’s really hard without formal authority, but it’s critical to the firm’s long-term sustainability.

#5 Shift to loving the problem (not the solution)

While we try to do more with less and stay up with game-changing ideas, many HR professionals are still expected to solve day to day problems so it’s easy – and tempting – to go into problem-solving mode.  Boudreau and Rice’s caution for HR professionals:  “Embrace too many ideas (from popular talks and articles) or apply them too superficially and you’ll develop a reputation for fad surfing. Dig beneath the surface to the fundamental scientific research and insights and you can set the stage for true impact.” So one thing HR can do to add more value is ‘fall in love with the problem’ – that way you’ll look forward to spending more time on understanding them more deeply.

#6 Shift to ambidexterity

One can think about firm strategy as two parallel streams: one being ‘exploit’ and the other ‘explore’ (based on the work of O’Reilly and Tushman). Exploit refers to efforts to leverage current strengths and capabilities to make the current core business as good as it can be. Explore refers to new exploratory and experimentation efforts that will hopefully bear fruit in the future.

Firms need to become more ambidextrous, that is, change the firm’s culture so that everyone embraces explore and exploit in his or her everyday work and client interactions.

In an environment of rapid change and hyper-competition, every firm needs a healthy portfolio of both exploit and explore initiatives. A genuine commitment to exploring will most likely mean substantial changes to the firm’s dividend policy and capital structure. Firm governance and structural arrangements are also likely to be impacted, as will marketing, pricing, IT, operations and, in particular, HR.

Join us in Melbourne November 21 or Sydney November 22

HRMinds have asked Joel Barolsky and Sue-Ella Prodonovich to help finish their year of seminars with a discussion of major trends and practical ideas for those with an HR remit. These November workshops will be in Melbourne on Tuesday Nov 21 and Sydney Wednesday Nov 22. Details and registration here.

From pyramids to rockets to ecosystems

In Articles, Commentary on 19 October 2017 at 8:36 am

The pyramid has been the foundation operating model in professional services for the past century. Put simply, a typical pyramid has a partner at the top, one or two senior practitioners below him or her, and then four or five juniors below them. These ratios obviously vary from practice to practice. Leverage of the mid and lower levels of the pyramid is currently the profit engine of most professional firms.

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More recently there has been much talk of the pyramid losing its bottom left and right corners and becoming a rocket. In this model, there are far fewer juniors and their work will now be done by a combination of technology and lower-paid process workers. The rocket is being driven by powerful clients demanding that services be ‘disaggregated’ (using Susskind’s term), that is, highly-trained practitioners doing advisory and judgement tasks and technology and para-professionals doing process activities.

In my view, the rocket is not the destination but merely a stepping-stone. The rocket model doesn’t really take into consideration the growth of client co-creation and client involvement in the delivery of services. It largely ignores the role of third-party software vendors, freelancers and experts in adding value to the firm’s offering. And lastly, it underplays the potential impact of HR, IT, BD and Pricing functions.

Take this recent case study for example. In August 2017, Allens-Linklaters won the highly-coveted ILTA Innovative Project of the Year award for its Real Estate Due Diligence App (REDDA). Allens’ Chief Legal Technology Officer, Beth Patterson, stated that REDDA was “the result of a collaboration between partners, real estate lawyers, technologists, project managers and business analysts at Allens, client representatives and artificial intelligence provider Neota Logic.”

This case study illustrates a future with a delivery model where a partner or project leader will configure up to six different types of resources, in the form of an ecosystem, to address a client’s need or solve a problem (see diagram above).

A cup of latte is pictured at a cafe in Sydney

Source: vocative.com

It’s important to distinguish this ecosystem model from a multi-disciplinary offering. The latter involves multiple professional services or technical disciplines working together. The former is focused on one service line, such as legal, integrating multiple resources, both people and technology and both firm and client, to provide the most cost-effective solution.

Even if I’m half right, there are profound implications of moving to the ecosystem model for firm strategy, culture and operations. Almost everything is likely to be impacted, most especially the firm’s basic economic model and profit engines. It will also profoundly change recruitment and development, measurement and reward, pricing and firm governance.

How ready is your firm for this kind of future?

The State of the Legal Market

In Articles, Commentary on 27 September 2017 at 4:26 pm

This is my conclusion, as lead author, to the 2017 Thomson Reuters Peer Monitor Melbourne Law School report on the state of the Australian legal market…

Screen Shot 2017-09-27 at 4.18.55 pmOver the past 30 years, larger law firms in Australia have had to make only two major strategic decisions: [1] whether to become a national firm and how, and [2] whether to become an international firm and how?

They now have to make a third.

The 2017 Peer Monitor data leaves little doubt that technology is changing the practice and business of law and that firms need a clear and coherent strategic response. Firms might decide to be pioneers investing in lawtech start-ups, teaching their lawyers how to code and experimenting with new cognitive technologies. Other firms might prefer to keep their powder dry and wait to see what works, which platforms take hold, and what their clients prefer. Either way, an active choice needs to be made. Each comes with their own risks and opportunities.

A key challenge in investing in a new way is that the current core business is still very successful. The 2017 Peer Monitor data suggests that despite a flat market overall, a fair number of firms are still making healthy profits. The challenge comes in balancing the old with the new.

One way for firms to address this balance is to think about strategy as two parallel streams: one being Exploit and the other Explore (based on the work of O’Reilly and Tushman). Exploit refers to efforts to leverage current strengths and capabilities to make the current core business as good as it can be. Explore refers to new exploratory and experimentation efforts that will hopefully bear fruit in the future.

One approach is to make the whole firm ambidextrous, that is, change the firm’s culture so that everyone embraces Explore AND Exploit in their everyday work and client interactions. An alternative approach is to keep the Explore and Exploit far from each other and avoid cross-contamination. In this instance, Exploit is the cash cow and hires the suits, and Explore is a cash burner and hires the black skivvies. A third approach is to try to do both.

 

latte-artttt

Source: academiedecafedemontreal.com

In an environment of rapid change and hyper-competition, every firm needs a healthy portfolio of both Exploit and Explore initiatives. A genuine commitment to Explore will most likely mean substantial changes to the firm’s dividend policy and capital structure. Firm governance and structural arrangements are also likely to be impacted, as will marketing, pricing, IT, operations and HR.

The role of managing partners is to lead the thinking around these issues and prepare the firm for its third really big strategic decision.

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